Monday, September 08, 2003

Tax Cut Myths: How often did George Bush tell us that his tax rebates and/or cuts would "put money in the pockets of Americans"? We were then supposed to believe that everyone would rush out and spend that money and therefore stimulate the economy. Turns out, that's not quite right. Apparently, while the tax cut can still be very beneficial, it's not for the reason many believe.

"A tax rebate must come from somewhere. If the government borrowed money to pay the rebate, then taxes would eventually be raised to pay it back. As a result, any rebate would be viewed, not as a permanent change in after-tax income, but as a temporary loan. Surveys show that consumers spent just 25% of the 2001 tax rebate. The other 75% was either saved or used to pay down debt."

So okay, the rebate is still helpful to the individual (decreased debt or increased savings), but it's not a jump-start to the economy. Instead,

"tax cuts work by increasing the incentives for new investment, not by stimulating demand. In the early 1980s, despite large tax cuts, consumers were not banging down the doors of local retailers for fax machines, cell phones, PCs, or broadband Internet connections. It was only after some very smart entrepreneurs decided to risk a great deal of money, time and talent developing these new goods and services that they became so ubiquitous. By cutting taxes on income and capital gains in the early 1980s, Ronald Reagan encouraged these entrepreneurs to take the risks necessary to develop these new technologies. To paraphrase Say's Law: Supply created its own demand."

This myth, as well as four others, is dissected. Hell, even Clinton gets props as a tax-cutting fool. Importantly, it's not a diatribe against tax cuts. To the contrary, it finds them very supporting. However, it's the type of tax cut that matters; even more so than size.